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Sunday, September 30, 2012

Stream Of Consciousness: The Global Economy

Let's take a quick tour around the global economy through some pretty charts. There is no rhyme or reason here, just a stream of consciousness on all things finance.

The median household income growth in the United States since 1999: down 13.3% for the 45 to 54 age bracket (the highest and most important earning years).

Auto sales in the US are back up to 14.52 million annually. This is still far below the 16 to 18 million sold during the 2005 - 2008 housing bubble boom, but it is much higher than the 10 million annually reached during the peak of the financial crisis. You can see the temporary spike up to 14 million annually for the cash for clunkers program. Subprime lending in the auto sector is back at full strength (providing loans to buyers who cannot pay them back) creating another temporary surge in the sector.

The following shows the number of people per country considered part of the ultra wealthy. It shows that America is still home to the majority of people around the world who find themselves in this category. This will shift dramatically when the US reaches its debt crisis and most of these "paper wealthy" will be caught off guard during the global wealth distribution.

Next up we have the public (government) vs. private sector debt growth. You can see the steady growth of the government (tan line) debt growth through the crisis which many argue has kept us out of another great depression. I argue that we entered the next great depression in December 2007 and the government spending has only masked the rotting under the surface which has not had the ability to heal. The cure will only do more damage to the patient in the long run bringing something worse than what was experienced during the 1930's.

The percentage of Americans with less than $100 in savings is incredible. It shows the thin line between current complacency and the social unrest experienced every day on the streets of Spain. See Checking In With Spain.

Global growth has collapsed around with world as the following shows the percentage growth in world trade year over year. We have once again moved back into negative territory, which as I discussed in US Stock Market Sentiment & Prices Soar: Shorting Opportunity?, has been completely ignored by the US stock market. It continues to levitate up into the stratosphere (while other markets around the world continue to fall with reality).

The Federal Reserve, since the conclusion of QE2, has stopped buying new treasuries with newly printed money. The interest rates on treasury bonds, for numerous reasons, have continued to fall (bonds rising in price) since the Fed left the market. One of those reasons is the re-emergence of the Asian buyers; Japan and China. Japan, which will soon face a debt crisis of its own and will need to sell foreign debt (US treasuries), has been steadily catching up to China as the second largest holder of US debt in the world (the Fed is first).

Japan's economy is already contracting, shown in the Japanese manufacturing PMI data below, and it is only a matter of time before their government debt bubble implodes and sends them into the world of pain seen in Spain.

As interest rates fell on Spanish debt since the announcement of the ECB's "unlimited purchase plan" in early September there has been very little discussion on the details of actual bailout Spain needs (which is why rates have recently begun rising again).

Spain must first ask for a bailout from the Eurozone and the ECB can only work in tandem with the ESM bailout fund to coordinate support. However, before that happens there must be actually money in the bailout fund. The German courts ruled that Germany can only contribute 190 billion euros to the fund which has now put significant pressure on France. The member country requesting the bailout (Spain) obviously cannot be a part of the group that contributes. This means that as of this point it will be up to France to pick up the slack of both Spain (requesting bailout) and Germany (cannot exceed 190 billion euros). Estimates show this slack rising to 226 billion euros or 44% of all tax receipts France takes in per year.

What is the problem with this?

Besides the obvious political ramifications, France's own economy is sinking deeper into recession and is rapidly moving toward a depression. The following shows the recent PMI manufacturing data for France (blue line). The GDP (orange line) is reported on a lag, which shows the dire direction the economy is headed.

The unemployment situation in France is just as bad. Both manufacturing (blue line) and services (orange) are moving back down to the crisis lows of 2009. The French government, deciding to take a gun to its own head, is now fighting off this recession with massive tax increases which will crush any hope of business growth and hiring (a preview of future US economic policy?).

France is just a snapshot of the entire Eurozone's economy which is moving further and further down the black hole due to the spreading government debt crisis. The following shows the Eurozone PMI (blue) with the lagging GDP (orange) which will soon be tracking lower.

The response to this global slowdown? More money printing everywhere in the race to debase currencies and boost manufacturing and trade growth. This is modern warfare fought in the currency markets. This chart shows the balance sheet growth of the big four central banks: Federal Reserve (America), ECB (Eurozone), Bank of England (the UK), and the Bank of Japan (Japan).

1 comment:

First and foremost I want to mention that I've been reading your blog for about a year and very much enjoy your insights.Let me ask you a question, I followed your advise and read James Rickards "Currency Wars". The book was great and led me to make a few conclusions about the current crisis and where we will end up.As you noted on multiple occasions the FED's response is to print and print ad infinitum.The end game of this being a global repudiation of a dollar not just as a reserve currency but the end of fiat systems worldwide. According to conclusion of the book (which I agree with) the FED is daring the world to give up on the dollar - hence unlimited printing. Plan B is already in place with the establishment of a new dollar which will be fully backed by gold. This will be possible due to the fact that approximately 57% of all the gold in the world is housed in US.With the above being the case it seems that the rates will never go down in our current dollars until the system itself is repudiated. If that is so, wouldn't it make sense to borrow as much as possible from the banks to purchase hard assets (real estate, agriculture, commodities)?

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There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

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